A Liberal Theory of Distributive Justice

View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by PhilPapers TWO THEORIES OF ECONOMIC LIBERALISM Mark R Reiff University of California at Davis Faculty Fellow, Safra Center for Ethics Harvard University, 2008-2009 ([email protected]) Adam Smith Review 10 (2017) (forthcoming)* Within the Anglo-American world, economic liberalism is generally viewed as the intellectual offspring of Adam Smith, and neoliberalism its sole contemporary heir. But the development of economic liberalism also draws important ideas from G. W. F. Hegel, or so I shall argue in this paper. Hegel's work on economic liberalism initially and most directly influenced German-speaking political economists it's true, but this work had a more subtle impact on many English-speaking political economists later too, for a generation of these were heavily influenced by their German-speaking teachers.1 And just as economic liberalism has not just one progenitor but two, it also has not one contemporary offspring but two: the other is called ordoliberalism, and while neoliberalism gets all the attention in the English-speaking world, ordoliberalism has been far more influential in the German-speaking world. But like many theories that can trace their inspiration to the same source, each of these contemporary versions of economic liberalism is very different. Indeed, each sees itself as embodying a different central defining metaphor. From Smith, neoliberals took the idea of the invisible hand, although I am going to argue that contemporary advocates of invisible hand theory have largely misconstrued or at the very least overstated the significance of this metaphor. From Hegel, ordoliberals took the idea of the civil society, and I am going to argue that the civil society is a much better metaphor not only for Hegel's but also for Smith's views.2 What I am going to spend most of my time doing in this piece, however, is trying to * Please note that this is the pre-copyedited version of the paper. The final published version may contain corrections, changes, additions or deletions, and should be considered the more definitive version of the paper as soon as it appears. 1 See generally Lisa Herzog, Inventing the Market: Smith, Hegel, & Political Theory (Oxford: Oxford University Press, 2012). 2 A similar point with regard to Smith and ordoliberalism is made by Herzog in Inventing the Market at p. 6 n. 22. 1 May 2016 Page 1 Two Theories of Economic Liberalism Mark R Reiff bring ordoliberalism more generally into the light—I will argue that by comparing and contrasting the views of Smith and Hegel or at least between how Smith and Hegel tend to be currently (mis)understood, we can better understand both the roots and the nature of these two contemporary incarnations of economic liberalism. And this, in turn, brings some interesting and important features of these two contemporary theories into view. Indeed, I will argue that ordoliberalism, not neoliberalism, is the better and more coherent instantiation of economic liberalism. But first, let's take a closer look at exactly what economic liberalism is and the context in which this attitude toward economic activity arose. I. The rise of economic liberalism largely coincides with the rise of economics as a discipline. For hundreds of years, the primary economic activity of almost every society that had formed itself into a nation was agriculture, at least if one excludes war and conquest as an economic activity. But beginning with the fifteenth century, more and more commercial activity started to involve the production of finished goods, making trade in these and in the raw materials on which they were based more and more important. By the end of the fifteenth century, the idea that agriculture was the only economic activity worth thinking about began to give way to what Smith calls mercantilism, the idea that there is such a thing as national wealth, that this is measured by the stocks of gold and other treasure held by a nation and by its balance of trade, and that these measures of economic activity are accordingly to be maximized.3 Now Smith would go on to rail against mercantilism (indeed, the title of the book for which he is most famous suggests that the mercantilism and its view of national wealth was his primary target), but there was one other common aspect of how economic activity was organized at the time that he also attacked. This was the guild system, which arose alongside mercantilism because non-agricultural commercial activity involved many small shopkeepers who were members of various guilds that set price and quality 3 See generally, Mark Blaug, Economic Theory in Retrospect (Cambridge: Cambridge University Press, 5th ed. 1996), ch.1; Joseph A. Schumpeter, History of Economic Analysis (Oxford: Oxford University Press, 2 1954), pt. 2, ch.7, pp. 335-376; Jacob Viner, "English Theories of Foreign Trade Before Adam Smith," Journal of Political Economy 38 (1930): 249-301. 1 May 2016 Page 2 Two Theories of Economic Liberalism Mark R Reiff standards for the goods their members produced and sold and controlled access to the profession. One had to be a member of the guild to deal in goods of that kind, for the government, seeking the favor of the rising merchant class, would protect the guilds from external competition through what Smith calls "the policy of Europe" and, more formally in England, through the Statute of Apprenticeship.4 Economic activity in Smith's day was accordingly both privately and publically regulated—it was privately regulated by the guilds in the sense that they set price and quality standards and prevented free competition from undermining these standards by strictly controlling entry into the profession. It was publically regulated by the government in the sense that the government gave the guild's regulations the force of law and in the sense that mercantilism entailed protectionism: because national wealth was thought to depend in large part on the balance of trade, much legislation had been enacted that effectively prohibited or at least severely limited the importation of certain foreign goods, the most infamous example of this being grain, whose importation was heavily restricted under the now-infamous Corn Laws.5 This, then, is the context in which Smith's views were formed and through which they must be interpreted and understood. A wide range of territory that involved what Smith understood to be economic activity was heavily regulated; monopoly and monopoly power was rampant if not expressly granted or at least protected under law; competition both foreign and domestic was often effectively suppressed and as a result innovation and entrepreneurship were difficult if not impossible. But the main problem with the way economic activity was understood at the time is that this understanding was unsystematic, incomplete, and sufficiently mistaken that it often produced counter-productive policies. In the face of this, 4 See Smith, Wealth of Nations, bk. 1, ch. 10, pt. 2, pp. 136-165. 5 I should note that there was also a national security justification for legislation like the Corn Laws. The argument was that the country should not be dependent on foreign sources for food and other critical goods and raw materials. To ensure the development and maintenance of a healthy domestic source of supply, certain industries accordingly had to be protected from foreign competition. Of course, there is a national security as well as an economic response to this argument: the national security response is that the more countries become dependent on one another, one for a source of supply and the other for the income that export of this supply brings, the less likely the two countries are to go to war. Indeed, this latter argument is one of the key motivations for the formation of the European Union. 1 May 2016 Page 3 Two Theories of Economic Liberalism Mark R Reiff Smith "was the first to try, with remarkable success, to arrange the subjects of economics into an organized discipline."6 His objective was to clear up a lot of existing confusion about how an economy operated and how to tell if it was operating well, and to suggest why we might consider changing certain prevailing policies and practices to ones that seemed more sensible given the interests of a wider segment of society than the segment that was technically in charge.7 What he developed was a theory about what should be the subject matter of economics, which included a theory about what made economies perform best, where best was understood as the greatest achievable amount of production given society's then existing resources. And so while it is true that Smith railed against the guild system and against international protectionism in favor of a system that allowed free competition both within and between nations, and Smith's views were therefore liberal or rather "liberalizing" in this sense, viewed in their proper context his views are best seen as a reaction to the almost smothering degree of control over economic activity exercised at the time by both private and public regulators. His was not an attempt to start a movement, or to replace one form of extremism with another—he was arguing for a middle ground, not the disestablishment of economic order in favor of what might be considered an economic free-for-all, despite the fact that this is what contemporary neoliberals would seem to have us think. Indeed, if one looks at Smith's work as a whole, one cannot help but agree with Jacob Viner, one of the founding figures of the what I think is fair to characterize as the relatively conservative free-market "Chicago School" of economics, who said long ago: Adam Smith was not a doctrinaire advocate of laissez faire.

Load more